At the height of the pandemic, I was listening to an audiobook by Pema Chodron. when things fall apartI remember getting emotional when Pema said. I had created thousands of spreadsheets for my life and my family, and it stood out because no one expected me to be living in the moment.
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The same goes for financial planning. The problem is that they consist of incomplete information. Even after doing all the research I can with the best spreadsheet software and the most powerful calculators, I still have a lot of unknowns. For example, what is the inflation rate built into the client’s financial plan in January 2022? My bet was 3%. But life happened as it is. Things didn’t go according to plan.
Looking at financial plans through this lens reveals that the ground we walk on is moving. As humans and financial planners, we do whatever it takes to escape uncertainty. We feel it’s part of our job. We are trying to solve this problem by creating ever more complex algorithms and looking for the latest fintech tools to create long term plans for our clients.
When we use projections and predictions, we can leave the client with the impression that we know what the next 30 years of their life will look like. is 90%.
This is pretty sure what financial life will look like for the next few decades. It suggests that this false sense of accuracy is one reason why people distrust our profession and the wider financial services industry, because certainty is easy to sell. it’s the inability to deliver it
another mental model
What advisors really need are skills to help them navigate uncertainty. These include awareness, resilience, mental flexibility and even curiosity. The sooner we embrace uncertainty like an old friend, the sooner we as an industry can provide real financial advice to the public.
Financial planning practices have been extremely frustrating to the people we serve and to us. This is due to a fundamental mistake. We have been working as if we were living in a simple system.There is a process in which simply doing A results in a result B.However, humans and their money do not live in a simple system. We live in a complex, adaptive environment where doing A kicks off a process that, in hindsight, may get you B or Z. The system is adaptive. The system leads to even more unpredictable events. The system changes when clients move from cash to investments or change spending rates. Not only the client’s solar system, but the entire market world is affected by every small change that the clients collectively make.
The more important part of real financial advice is how you professionally assist your clients when the “mistakes” show up. Please try to imagine. Of course you know the trail. Of course, we checked the weather forecast and did everything possible to prepare. Then out of nowhere comes a storm. The client is quite frightened. they don’t know what to do They have never been to the mountains in a storm. Your job is not to prove to them how right your plans for blue skies were. is to do our best.
In times of high volatility, a true financial guide will be honest about a person’s financial future and show compassion for those they trust to guide them through good weather and bad. The best way to do that is to ask the right questions and give them the space to answer without judgment.
Second best
We feel like we did something wrong when some part of our financial plan goes wrong. I feel like we let people down. You can feel embarrassed and even embarrassed. I would humbly suggest another method. Invite mistakes and actively seek negative evidence that contradicts your plans. welcome. Only by embracing honesty and openness with yourself and your clients can you benefit. As a result, you will be able to provide better financial advice.
Financial planning always involves making assumptions about the future that are wrong. If you can accept this, instead of spending so much time and energy trying to find the equivalent of the law of universal gravitation in financial services, in the reality that you know it to be true about your profession. live and can provide financial advice accordingly.
Financial planning doesn’t always have to be the perfect answer. Yes, the 30 year plan is important and gives us goals. But once that’s done, you need to put them away and get clarity about your current reality in order to settle for the next best step. Even today it’s not exactly accurate. True financial planning is about making fewer mistakes tomorrow.